Rent vs. Mortgage: What You Should Know About These Costs

If you’re part of the 34 percent of the United States population who rents a home, you already know how the payment process generally works: You pay a landlord or rental company on a monthly basis to live in their property. When you buy a home with a mortgage, your payments go to a lender until you’ve paid off your debt and fully own it. Before you decide to finally break free of the rental cycle and establish roots in a home you own, learn more about the potential financial drawbacks and benefits to both paying a landlord and paying a lender. 

Pros of Renting  

Less Expensive 

Generally, when you rent a home, upfront costs are less than when you buy a home. This can include the following: 

• Application fee 

• Security deposit 

• Move-in fee  

• First and last month’s rent 

• Renter’s insurance 

• Pet rent and pet security deposit 

• Any moving costs 

Depending on the landlord or company you rent from, these fees can vary, and some won’t even be applicable. However, this total is typically less than even a down payment on a mortgage. Afterwards, your monthly rental payments may also be less than if you had a mortgage since you won’t have to worry about property taxes and other homeowner costs. 

No or Low Maintenance Costs 

Since you don’t own the property or appliances when you rent, it’s typically not your responsibility if there are issues and you most likely won’t have to pay for these maintenance costs. In many cases, you won’t have to clean septic tanks (or hire someone to do so), mow the grass or repair water pipes, just to name a few examples. 

Fewer Strings Attached 

When you’re renting, it’s much easier to pick up all your stuff and move. It might even be more desirable if you’re searching for a neighborhood or city that fits your lifestyle. And you won’t have to worry about all the prep work, processes and costs it takes to sell a home and buy a new one.

Cons of Renting  

Rent Hikes 

Perhaps one of the biggest drawbacks to renting is the potential instability of rent costs. Since you don’t own the home, you don’t have control over what the landlord can set as the monthly cost. Some landlords won’t even give you a notice. This increase can greatly affect your monthly budget for other necessities including utilities, groceries, car payments or phone bills.  

Inability to Make it Your Own 

Oftentimes, you’ll need to ask permission if you want shell out the money to do anything drastic to the home you’re renting. Sometimes, even painting the walls could be a “no go”, and tearing down a wall is more often than not a definite “no”. 

Doesn’t Guarantee Equity 

When you pay rent every month, it goes straight to your landlord. You don’t really invest in yourself or your future when you’re renting. Of course, paying rent gives you a place to live, which is one of the basic needs of any human. But it doesn’t give you any of the financial benefits that buying a home can.

Pros of Buying 

Stability 

When you have a fixed-rate mortgage on a home, your monthly payments can potentially be the same for the entire life of the loan. This predictability can help with your other monthly expenses and help you budget or save for other essentials and/or desires. In addition, if mortgage interest rates drop, you may be able to refinance your loan to decrease your monthly payment or receive other favorable terms.  

Personalization 

A home you own means you can do pretty much anything to it. Want to paint your living room neon yellow? Go for it. Thinking of adding a sunroom to the back of the house? If you have the funds, why not? The point is, you can modify, upgrade and renovate to your heart’s (and budget’s) desire. And if in the future, you decide it’s not really your style anymore, guess what? You can change it again if you have the money to do so. 

Potential Tax Benefits 

As tax season rolls around, homeowners can potentially deduct specific items, including: 

• Mortgage interest 

• Property taxes 

• Home equity loan interest 

• Mortgage points and origination fees 

Every homeowner’s situation is different, so make sure you consult with a financial planner before you start filing your taxes. 

Build Equity 

Equity is the amount of home you own or the difference between what your home is worth and how much you owe your lender. With every mortgage payment you make, you have the potential to build more and more equity. What can you do with it? A number of things: Get rid of private mortgage insurance (PMI), renovate your home, consolidate debt and take cash out for any big-ticket purchases. 

Cons of Buying 

Home Maintenance  

Owning a home means you own everything about that home, including anything you must maintain. For example, landscaping, structural repairs, everyday cleanliness, sidewalk and driveway maintenance and more. These responsibilities can take a lot of time, money and hard work.  

Risk of Decreasing Value 

While homes typically increase in value over time, there is a chance that they could decrease in value. This means that if you didn’t put a down payment on your home or put down a low amount and haven’t built enough equity in your home, you’ll owe more than your home is worth and you’ll have negative equity. 

Property Taxes and Other Hidden Costs 

Many homebuyers don’t think about the additional costs there are to owning a home, such as property taxes, homeowner association fees or homeowner’s insurance. Make sure you receive the full picture of homeownership costs from a professional lender or real estate agent to understand what you can realistically afford. 

What’s Worth it for You? 

Whether or not you’re ready to buy a home depends on your finances, goals and mindset. You may want to wait to save a little more for upfront costs or rent around for a couple of years to figure out which neighborhood suits you. No matter what your needs are right now or in the future, make sure you educate yourself on the financial benefits and drawbacks of both renting and buying a home. 

This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.